Where’s The Rest Of The Money?

A Dubuque man’s recent top-prize win in the “Set For Life” instant-scratch game sparked an online conversation among some folks who questioned the amount he’d won. We’ll cover the issue here today to try to clear things up!

The situation involved in Set For Life is the same as in Powerball® or Mega Millions®. It all has to do with whether you choose to receive your winnings in a one-time, lump-sum payment or in annuitized payments over time.

When Sorin Ganea of Dubuque claimed the top prize in Set For Life on Feb. 8, he chose to receive his winnings in a lump-sum payment. The $20 scratch game features eight top prizes of $1 million. And, if you win the top prize like Ganea, you can receive the money in annuitized payments or as a lump sum. If you choose the annuity, you’ll be paid $40,000 a year for 25 years, which adds up to $1 million. If you choose to receive the prize as a lump sum, you’ll receive $650,000 before taxes.

The difference between the two amounts has to do with interest money. And when you choose the cash option, the interest money doesn’t exist – all you get is the cash that the lottery has on hand from the sale of tickets in the game. Let’s take a closer look at that.

When you choose the annuity option, the lottery invests the initial money from the sale of tickets in the game and then gives the player payments over a period of years. The money that’s invested earns interest over that time, so the initial cash plus all that interest adds up to the annuitized jackpot amount.

When you choose the lump-sum option, all you receive is the amount of money that’s on hand from the sale of tickets in the game. There is no interest money because you’ve chosen to get a one-time cash payment.

So the bottom-line answer is that when you choose the cash option, the interest that would have built up over time doesn’t exist. Nothing happens to “the rest of the money” and no one else gets it because it simply isn’t there. That’s why the cash option is always less than the annuitized prize amount.

Comments

[Mary Neubauer]

Hi, Dave. Entertaining concept to discuss, but that's not a realistic approach that will work for prizes. Estimating jackpot amounts is a very precise process based upon interest rates and the specific length of the annuity payout. Thanks for giving us a smile, though!

Mary

[Dave Swenson]

Yeah.. Why not Advertize the Lottery Jackpot is $1 Tillion and the annuity taking 1000 years to pay off.

[Mary Neubauer]

No worries, Dave! We're always glad to hear from you. You've articulated your viewpoint very well. I do want to point out that we here at the Iowa Lottery provide information about BOTH the annuitized and lump-sum value of the prize so people can evaluate it both ways. We show the annuitized and cash jackpot amounts in Powerball and Mega Millions on our home page and the page for the Set For Life game provides detailed information about its top prize as well. In the end, it's up to the winner to decide and we want them to have the info. they need. Take care, Mary

[Dave Jones]

Personally I think that the jackpots should be presented at their actual cash value, instead of inflating the advertised numbers to have a seemingly much larger jackpot. Most, but not all people opt for the lump sum prize anyway, and if they want it parceled out over a set amount of time I am sure somebody would be more than eager to help them with it.
I know that the presumed point of it is supposed to be to protect the winners from spending themselves broke right away, however, a significant percentage of the annuity winners do that anyway by ending up selling the remaining years of said annuities to one of those firms that will pay them a pittance of what they would otherwise get.
I have commented before on the bourgeoning perception of a partial amount of the masses believing that the "fix is in" on the lotteries anyways, and being some what untruthful instead of being up front just gives fodder to the fire, so to speak.
And before you or someone tries to "explain" the reasoning behind the practice let me cut you short by adding that I realize that all (well, actually just MM and PB) would have to adopt the practice because otherwise one would be trying to compete with the base perception that a $50 million actual cash value jackpot is a lot less than let's say a $70 million pot in which the $50 million is actually more money.
The one thing that I have noticed is that when people on this side of the pond talk about the Euromillions game they are somewhat envious that the jackpot is actually represented truthfully in the actual cash value, (that and the fact that they don't have to pay tax on it, but that dog won't hunt with our government in America). Granted, it's not like the lotteries have trouble selling tickets, but I am just suggesting tweaks and changes that reflect the meandering musings of the public at large. Sorry for the length (I have GOT to get a life).